How close to 30% IO are the banks at?

Obviously APRA wants to see the banks providing IO terms on less than 30% of new loans.

Is there a way to view what these stats are at? Would be interesting to see how this has changed over time, and how close to 30% the banks are at present.

 

I saw some stats on Tuesday - they weren't current but had the 4 majors around 41-46% the figures where from different reporting periods ~Feb17 - May17.
I believe most are either below or close to. From memory deadline or next reporting was Sept17.
But I'm not sure, it's too early.

 

I haven't seen any recent stats for the majors/entire market but I do know a number have gotten well under now at circa 20%, whilst a couple in the low 30's so I think they'll make it in time.

If they can maintain their levels under the caps for both interest only loans and investment lending we should see a slow stabilisation of the market so lenders can reduce their jumping in and out of the market and price shocks.

 

I read something earlier this week that it was estimated that ANZ is the best positioned out of the big 4 banks at the moment. Not surprising as their profile has never been an attractive one for investment, it stands to reason that their I/O exposure would be lower than the others.

 

The 30% limit is a APRA cap. In reality I believe the banks have been told 0% is a good target to avoid scrutiny. If lenders went to a avg of 18% and one major bank was 29% you can expect APRA to raise that with their Board of Directors.

I used to get involved with company boards and APRA and they set very clear directions with Boards. A 30% target isnt indication its compliant. They have also likely set a range of other indicators that marry to that target too. ie Sydney, Regional....Commercial, Resi, New Construct, Existing, refi, first loans, investors....

APRA have real time reporting within the bank. Data is also commercially sensitive.

 

Given very recent pricing changes in the market (CBA & Macq this week), i suspect the banks are under this cap now. Pricing is the tool they've used to achieve the rebalancing & IO fixed prices have dropped from key lenders this week & the temporary very large difference between IO & PI appears to be closing together again. Similarly some sharp P&I rates have risen too (Westpac). Anectodally i assume these pricing decisions have something to do with the arbitrary limits placed on them.

Lenders falling below this 30% cap based on new lending between May & today wouldn't surprise me much - the large rate differential in place for a while now should drive majority of business to P&I, i suspect that data will come out in a few months to show this has happened.

 

the rate reductions from CBA was a nice surprise.

 

Awesome, great to see most banks are close to where they need to be, and are relaxing a bit.

 

Dont be too quick to consider this a "relaxing" position.... 30% of new business is an easy target to meet with short term "on " or "off" tap movements to regulate the "flow"..... But the banks have to stay at this level now. And they still have to deal with the rather large elephant in the room... how to manage/migrate a pretty large number of the 46% of existing borrowers already using I/O lending.

Many of those borrowers have not reached their I/O term limits yet so havent gone seeking an I/O extension ........ yet. But they will reach the end of their I/O periods and they will seek extensions.... and 46% + new demand simply doesnt fit into a 30% hole.

So the P&I cliff will remain a serious issue facing many investors, well into the future. So make no mistake, the 30% I/O quota will continue to be felt.

And we havent even started getting into Basel IV yet...... and the basis points thats going to bring on.

 

APRA were very specific in noting that the 30% benchmark was on 'new lending', not existing book lending. I don't know if existing lenders are actually under pressure to turn their existing books over to P&I. I assume so, given the pricing incentives are in place for existing borrowers, but that wasn't actually part of the regulators announcement.

Plenty of existing borrowers are making the switch too. I know we've done a lot of swaps for existing customers in recent months, i think incentives pushing up prices for IO INV loans to near/above 5% & P&I fixes @ 3.88% have led to a lot of borrowers swapping. Imagine its the same elsewhere given the incentives.

Agree, there is a payment shock on the way for over leveraged borrowers. With rates this low & P&I rates still starting with a 3 or early 4% range, its likely manageable though. If rates push up at the same time as significant rollovers to P&I, that will leave some poorly prepared over leveraged borrowers exposed to price shocks.

Overall the management of 'payment shock' risk for lenders has been via a slow steady managed process - using incentives to cushion the blow & a low rate environment to help ease a transition.

 

Surely existing loans get counted as they get rolled over/refinanced once the existing IO period ends? Otherwise it would be pointless and just playing around the edges otherwise.

 

When the cap was introduced I remember reading Westpac was highest, on about 50%. CBA was in the low to mid 40% range. I believe ANZ and NAB were in the 30s with, I think, NAB on the lowest at about 32%. Not sure where they're at now.

 

Agree, but in my mind at least, it's with a clear view to migrating entire books to 30% over time, and restoring the preferred 70/30 balance (or thereabouts) that has traditionally existed. If APRA leave a 30% quota in place for 10 years for example, just about every existing I/O borrower will face the quota conversation with their lender at some point... and all books will find their way back to 30% I/O or thereabouts. So in the short term the quota may mean "new money", but in the long term it will quite likely mean "all money"

Sure, some P&I rates are that low, but generally (although not exclusively) it's for O/Occ deals. The discounts/ sharp pricing options get a whole lot fewer when its INV debt rather than O/Occ debt that's involved. Recent cheap P&I INV offers by 2 or 3 lenders within a marketplace of 40+ lenders have been the exception, not the rule.

Even if every lender was offering P&I investor rates at high 3's, low 4's (which is definitely not the case) I think it's important not to overlook the fact that there are going to be not insignificant servicing challenges that many will face in trying to access those deals. Lots of investors are going to be stuck with the lender they are already with, and will be unable to refinance and will have to cop whatever P&I investor rate their lender sends their way.

I'm still very firmly of the view that the only way to control your own destiny while building a resi portfolio is to control your borrowing power; and for that , debt reduction remains absolutely key... and yet again that's why adding at least 1 x cash cow is something every resi investor who isnt on big money or whose portfolio isnt generating better than 7% already - should consider. Purchasing the extra income is just smart business for people falling into the above categories. Simple as that